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Monday 06/23/08
THE CASE FOR AN OIL DECLINE-and an Opportunity at 05:53 AM EST
My saying we are due for a sharp decline in oil doesn't make it happen...as a matter of fact nothing I say makes any difference in the markets, BUT it isn't wishful thinking either.
Here is a sector you probably haven't been watching, and if you have are at this point totally confused. Consider some of these price moves over the past year for the oil refiners: Frontier Oil (symbol FTO) 28%. Valero Energy ( VLO) 40%. Tesoro ( TSO) 63%. Alon USA Energy ( ALJ) 64%. Western Refining ( WNR) 76%.
Pretty good heh?....And makes sense since crude oil is up 40% right?
EXCEPT THESE NUMBERS REPRESENT THE DECLINES IN SHARE PRICE FOR THESE STOCKS!!
The values of the refiner's stocks GO DOWN the higher the prices of oil!! A refinery converts crude oil into usable products like diesel and gasoline. Its profits come from the "crack spread," which is the difference between the cost of oil and the price of gas or diesel. The best situation for these companies arises when the crack spread is large and they can sell their product for a high amount relative to crude oil....just the opposite of what we are encountering now. Despite the increasers you are paying at the pump, the ratio to the rise in crude is nowhere even close.
The following was extracted from a Bloomberg report.
Refinery executives are buying more of their own stock than at any time since 2000, indicating that insiders are betting that a retreat in oil will boost profits and reverse the biggest share decline in a decade. The 42 percent slide in oil and gas processors is the largest drop since at least 1995, after a 40 percent gain in crude pushed down profits. Profits at U.S. refiners plunged 98 percent in the first quarter after they were unable to compensate for oil's rise with higher gasoline, heating oil and jet fuel prices, data compiled by Bloomberg showed.
Irl Engelhardt, chairman of the Federal Reserve Bank of St. Louis, bought $509,000 worth of Valero shares last month, his first purchase since becoming a director of the largest U.S. refiner in 2006. In the same month, Tesoro director John Bookout III boosted his stake by 58 percent in the third-largest U.S. refiner. Valero and Tesoro, both based in San Antonio, have declined 39 percent and 57 percent this year.
William Grube, chief executive officer at Indianapolis-based Calumet Specialty Products Partners LP, CLMT, bought 50,000 shares at between $11.73 and $16.85 a share in May, data compiled by Bloomberg show. The purchases, which began two days after Calumet slumped to an all-time low, were the first by Grube since the company went public in January 2006, according to the data.
These are true value stocks now with PEs in the mid single digits range of 6-9.
Here is a composite chart with TSO in bright green plotted against the USO for comparison and the story is compelling.
For an even more dramatic snapshot look at this comparison of the USO oil index vs all of the major US refiners..  If the insiders are buying their own refinery stocks for the first time in 8 years for some of them there must be something in the wind. IF YOU WANT TO LEARN HOW TO FIND THESE HIDDEN GEMS AND A LOT MORE ISN'T TIME YOU SIGNED UP FOR ONE-ON-ONE MENTORING WITH ME? I HAVE ONE MORE SLOT OPEN THIS MONTH.... Click here for details
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Sunday 06/22/08
SUNDAY 6/22/08 UPDATE-Next Week's Trading at 03:57 PM EST
We have gotten through the Quad witch with a lot of technical damage done in the last couple of weeks but this coming week will be the one that is critical for the next intermediate period.
Oil was the controlling factor in the last period and will remain on the table despite its obviously overbought speculative position until we see some catalyst. This weekend we have the OPEC meeting in Jiddah at which a loosening of the spigot may or may not take place (in addition to those promised by the Saudis) but there are still plenty of "news" events in play that can serve as excuses for inaction. In a slow news cycle, potential Iranian attack exercises by Israel have fueled speculations and we saw multiple $5 swings in the price of crude last week.
Looking at the USO you can see that in its overextended price action we are now sitting on top of 3 gaps in recent price history.
Gaps like these are normally closed within 3 weeks over 90% of the time and though we are in an extraordinary period of time for this commodity, there is mounting pressure to the short side. Once we have a climax we can expect the capitulation to the downside to be swift and meaningful.
Stocks of course will respond accordingly and it may be that next week will see a capitulation of the SP500 to its critical support of 1300 which should form the basis for a coordinated rebound in stocks.
As of Friday the put call ratio is back into the panic state that normally preceeds a rally (As an inverse indicator it is overbought when low and oversold when high).
Each day, the CBOE adds together all of the call and put options that are traded on all individual equities, as well as indices like the OEX, or S&P 100. Purchasing a call option, you'll remember, simply amounts to a bet that a particular a stock or index will rise in value. By contrast, a put buyer is anticipating that an underlying stock or index is poised to fall.
Volume of put option contracts / Volume of call option contracts
On days when the major averages perform strongly, the number of calls bought typically far outweighs the number of puts. On these days, greed prevails and the put/call ratio may be very low -- perhaps in the neighborhood of 0.70. On days of deep market weakness, however, fear prevails and the number of puts purchased is generally far greater than calls -- possibly reaching 1.10.
Put options buyers came surging into the markets in such a frenzy that indicates a setup for a fall as they are invariably wrong when they come to the table so late, just as they are wrong chasing calls as the market stretches for market tops. The percentages of success for those late to the party are not good..usually on the order of 93% failure.
Our Markethealth indicators that we use for short term timing (3 months) are showing the stress as well, with the NYSE percentage of stocks above their 200 day moving averages coming right down to the support line...
Henry Ford
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